Lawmakers are preparing to come to terms with the primary provisions of the Tax Cuts and Jobs Act (TCJA). That simmering dispute has boiled over, particularly when it comes to the state and local tax (SALT) deduction. The TCJA of 2017 implemented a $10,000 limit on SALT deductions, to expiry after 2025. Former President Donald Trump has recently voiced support for raising this limit, a proposal that could significantly benefit upper-middle-income taxpayers who typically face higher state and local taxes.
As negotiations continue, the effects of proposed changes to SALT are becoming clearer. If Congress were to raise the cap on SALT deductions, the big winners would be upper-middle-income earners. This adjustment would raise their income level by more than $16,000 annually. Lower-income earners do not usually bother with itemizing their deductions. Consequently, they are much less likely to benefit from repealing or raising the SALT cap.
Second, the TCJA expanded the maximum child tax credit for kids under 17 years old. It increased it from $1,000 to $2,000 per child, but it made that increase temporary. This provision broadened eligibility for families, putting the credit within reach of more working parents and letting them take full advantage of the credit. The House Ways and Means Committee has proposed an historic expansion of this credit to $2,500 per child. This amendment would apply for four years beginning in 2025, reflecting a strong commitment to address families’ need for more financial relief.
Not all lawmakers share the same vision for where these tax policies should lead. Among other demands, some are calling for a “more fiscally responsible package,” which could mean drastic changes to even the individual provisions being considered. The full committee was scheduled to markup and advance legislation later during a special full committee session a week from Tuesday.
The ever-present alternative minimum tax is a sticking point, too. This tax clawback effectively makes benefits less generous for some higher earners. It makes it much more difficult for taxpayers who were hoping to benefit from expanded or new deductions or credits.
Read more from Alex Muresianu, our tax policy analyst, about what lies ahead as Congressional leaders seek to move forward with the proposed changes.
“The narrow [Republican] majority in the House is going to make that process very difficult.” – Alex Muresianu
He pointed out too that legislators have tools available to them. Specifically, they can make sure that they “mitigate the damage” of any bad results that come out of these negotiations.
On the whole, Shai Akabas, the Bipartisan Policy Center’s vice president of economic policy, is encouraged. On tax policy, he perceives a greater likelihood for bipartisan agreement on targeted tax relief as opposed to wholesale changes.
“There’s a lot of bipartisan agreement on preserving and hopefully expanding that.” – Shai Akabas
Lawmakers are clearly recognizing the growing imperative for them to get serious about addressing taxpayer concerns. They understand the importance of acting before important provisions sunset in 2025.
The debates over SALT deduction and child tax credit illustrate fundamental problems in America’s tax policy. These issues represent bigger fights that shape the public’s experience with the tax code. With various stakeholders weighing in, the outcome of these negotiations will not only affect taxpayers but will shape future tax legislation.